Kunibert Raffer 6th UNCTAD Inter-regional Debt Management Conference Geneva, 19 – 21 November 2007 Structured International Debt Settlements (SIDS): Insolvency vs. Contested Claims

“The international financial system is incomplete and insecure without a sovereign debt workout mechanism and a new effort needs to be launched in this regard.” “Argentina in 2002 demonstrated again the need for a fair, transparent and orderly process for sovereign debt restructuring” Report of the Secretary-General, 10 August 2007, General Assembly (A /62/217) UN, pp.26f) Present debtor strategies (Argentina, Nigeria, Ecuador) and discussion on legal basis of debts result from absence of fair, transparent, orderly arbitration process 2 nd to n th best solutions because first best solution remains blocked

 Creditor Litigation Purely legally: claims remain valid and enforceable nearly one fifth of “vultures” accepted arbitration Paris Club violates other creditors’ basic rights, forces debtors to do so, simultaneously denying them any protection  Illegitimate, Odious and Other Types of Debts Moving from “unpayable” to scrutinising legal base: criminal, odious, illegitimate debts, abusive credits; Norway: creditor co-responsibilty Clear tendency to advocate applying generally accepted legal principles finally also to Southern sovereign debts

Defining Illegitimacy Type A: illegal debts legally null and void; incurred in violation of national laws, of international law, in breach of legal obligations or IFI-statutes; violate general universally accepted fundamental legal principles (human rights); ex turpi causa non oritur actio; creditor liabilities, criminal debts - “abusive credits” (Bohoslavsky ) Type B: debts that might be legal by strictly formal standards, yet whose existence or servicing violates socially established norms Often, servicing cannot be enforced or even expected [gambling debts; equity in common law; public interest (US railways: Subchapter IV, Chapter 11, Title 11 USC ); Norway’s ship export debts(?)]

Distributing Losses: Insolvency and Contestable Claims - Bona Fide Creditors and Haircuts Country A: total debt stock = 100; IFI claims = 40 A can only service debt stock of 50 “haircuts” suffered by recognised creditors: ALL CREDITORS EQUAL: all lose 50% 40 null & void 16.67% IFIs EXEMPT (no IFI debt declared null & void): all others lose 83.33% 40 null &void 50% DEBTOR ALWAYS GETS 50% OFF – BECAUSE 50% IS UNPAYABLE

Article IV.4.c, IBRD’s AofA “If a member suffers from an acute exchange stringency, so that the service of any loan contracted by that member or guaranteed by it or by one of its agencies cannot be provided in the stipulated manner, the member concerned may apply to the Bank for a relaxation of the conditions of payment. If the Bank is satisfied that some relaxation is in the interests of the particular member and of the operations of the Bank and of its members as a whole … (ii): The Bank may modify the terms of amortization or extend the life of the loan, or both.” NO Conditions Required except exchange stringency

$[100(1 - p) - reserves]ti g p =repayment probability, hence 100p is expected value, t =tax rate i g =interest rate at which the Treasury itself borrows Insuring against Losses and Stablising Financial Markets Cheaply and Effectively t = 40 percent i g = 4% difference of $100 costs of $1.60 per year.

“The increase of concessional and non-concessional lending, including by emerging creditors, would point to the need for work on an internationally accepted debt workout mechanism that involves all creditors. Countries thus need to agree on a set of principles for resolving potential debt crises that provide for fair burden-sharing between the public and private sectors and among debtors, creditors and investors.” Report of the Secretary-General, 10 August 2007, General Assembly (A /62/217) UN, pp.27 "I would go a step further and propose that, in the future, we consider an entirely new approach to handling the debt problem.... establishing a debt arbitration process to balance the interests of creditors and sovereign debtors and introduce greater discipline into their relations.“ Kofi Annan (2000) “Freedom from Want”, in: We, the People, Millenium Report, p.38)

Thank you MerciGraciasShukran СПAСИБО 謝 謝 謝 謝 Kunibert Raffer